Halsey Company manufactures 20,000 units of wheel sets for use in its annual production. Costs are as follows: direct materials are $40,000; direct labor is $50,000; variable overhead is $35,000; and fixed overhead is $70,000. Bowie Company has offered to sell Halsey 20,000 units of wheel sets for $10 per unit. If Halsey accepts the offer, some of the facilities presently used to manufacture wheel sets could be rented to a third party at an annual rental of $15,000. Additionally, $1.50 per unit of the fixed overhead applied to wheel sets would be totally eliminated.
Requirements: Prepare an incremental analysis schedule to demonstrate if Halsey should accept Bowie's offer.
Homework Answers
Incremental analysis
| Make | Buy | |
| Direct material | 40000 | |
| Direct labor | 50000 | |
| variable overhead | 35000 | |
| Fixed overhead (20000*1.5) | 30000 | |
| Purchase cost | 200000 | |
| Opportunity Cost | 15000 | |
| Total relevant cost | 170000 | 200000 |
No Company should not accept Brownie's offer
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